Business Protection Episode 1: Tax efficient life cover
The current global COVID-19 pandemic has shown us just how quickly the unexpected can happen and the major impact that it can have.
These times of uncertainty highlight the importance of protecting what matters to you and your family.
Although state benefits provide some support, few families want to rely on the state to maintain their standard of living. It is therefore crucial to keep abreast of the level of your insurance cover.
Over the next few weeks we will look at the different types of protection a business owner should consider.
What is this blog series?
Our new Business Protection blog series is aimed at business owners who are concerned about the “what if…”? questions.
Episode 1 comes from Omar Din, Financial Planner at MHA Tait Walker Wealth Management. Omar has over 13 years’ experience of working with personal and commercial clients.
“It is key to plan for the unexpected so that the business doesn’t falter, even if you or someone key does.”
Our Financial Planning team will discuss your particular circumstances, with the aim of developing a strategy so that appropriate arrangements and protection mechanisms are in place should anything untoward happen.
Tax efficient life cover
What is it?
- A policy that provides individual life assurance – for example to a salaried director.
- Provided for the individual and paid for by the company.
- Pays out a tax-free, lump sum on the death (or in circumstances where a ‘significant illness’ involves retirement) of the person insured.
- The proceeds go to the employee’s family or financial dependants.
Why have it?
You should have it in order to protect loved ones from financial worries, should the worst happen. You insure your car so shouldn’t you insure your most valuable asset – yourself.
It is also a tax efficient benefit which can be offered to business owners and employees.
Why think about it?
- It provides the opportunity for smaller companies to offer a death-in-service benefit to its employees (including salaried directors).
- Offering life and ‘significant illness’ cover demonstrates how much your business cares about the well – being of your employees, which can be useful in both recruitment and retention.
It’s an important financial planning solution for:
Often small business don’t have enough employees to be able to offer a group scheme. However, relevant life cover can be on an individual basis. Therefore, a small business can take advantage of the tax efficiencies generally enjoyed by larger companies.
High earning employees
Group schemes are restrictive in the amount of cover provided, and what is included as ‘salary’. For a higher earner this may not provide sufficient cover.
As opposed to a Relevant Life Plan, there are some little known pitfalls with a group life scheme – this is because a group scheme falls under pension legislation.
Why does that matter?
If the person covered dies, the lump sum death benefit is added to the employee’s pension fund. So, when it comes to calculating the lifetime allowance (currently £1,055,000 tax year 19/20) – this lump sum could make a big difference as anything over the allowance is taxed at up to 55%.
Crucially, benefits from a relevant Life Insurance Policy won’t count towards either the annual or the lifetime pension allowance.
How does it work?
Sam Jones is a salaried Director of ABC Ltd. He wants to know that if he dies, his wife Sue and son Josh have no financial worries. He needs life cover to protect his family; a lump sum of cash from a life policy will provide that protection.
- His company – ABC Ltd takes out a policy on Sam’s Life
- The plan is put into a Trust with Sue and Josh as beneficiaries
- Sadly Sam dies or has a ‘significant illness’*
- The Trust makes a claim to the life company
- The life policy pays the claim money to the trustees
- The trustees then pay out to:
- Sue and Josh if Sam has died
- Sam himself (in the case of a significant illness)
* which leads to retirement or anticipated retirement)
And the tax efficiency?
- Receive corporation tax relief on the premiums
- Pay no employer NI on premiums*
- Sam benefits aren’t taxed as an employment income (no P11D)
- He pays no NI on premiums or benefits*
- Any benefit would not be included in Sam’s estate for inheritance tax purposes.
- Benefits do not count towards pensions annual or lifetime allowances
*as long as premiums are fully employer funded.
“Developing a protection strategy and knowing the right plan is in place, if the worst happens, provides peace of mind to many of our clients.”Deborah Trelease
Other episodes in this blog series
At MHA Tait Walker Wealth Management we have a team of Financial Planners whose aim is to help businesses and individuals ensure they have the right protection for them, their families and their business.
Tel: 0191 285 0321
The purpose of this blog is to provide technical and generic information and should not be interpreted as a personal recommendation or advice.